Bruce Whitfield  00:18

Arthur Karas with us this evening. That relative underperformance of China is what has characterized today's market activity, Arthur. Good evening.

Arthur Karas  00:25

Good evening. Yes, absolutely. Two disappointing sets of results, the Chinese numbers, as you were discussing previously. And then also, while a strong number in many respects from Richemont, an underwhelming number in terms of expectation. So, the market looking at those results and saying is this top of the luxury cycle, should we expect things to slow down from here.

Bruce Whitfield  00:52

The luxury cycle, of course, epitomized by Richemont, the luxury goods group whose share price fell 9% today. It's been riding a post-Covid wave of extraordinary demand. And finally, either we've got enough bling, or people have run out of money to buy the bling. I'm not too sure which one it is, but either way, sales are slowing.

Arthur Karas  01:12

Yes, if we break the results down, what's interesting is that Chinese sales, and this for the second quarter of the year, Chinese sales are up 40%. So, phenomenal results and it just really shows their economy opening up post-Covid, people starting to travel, people moving around, and wanting to spend some money. Whereas in the US, sales are down 2%. So, they've had strong sales, we've gone through that cycle. And there we're seeing things slowing down. So, those are two very different markets giving us two very different reads on what's happening in those two markets. So, you kind of need to look at that Chinese number and say, well, the consumers are spending money even if the industrial part of the economy is not pumping.

Bruce Whitfield  01:55

I was talking to some American friends today just say the mood in the United States is really, really gruesome. It's one of deep concern about the future. And this anticipation of a recession, which is going to decimate jobs and destroy livelihoods all over again. There's a... I won't say panic in their circles within the United States, where people are concerned.

Arthur Karas  02:17

People are concerned. I think we're having this big debate about what the outcome is, or what the outcome is going to be of all these rate hikes that we've seen in the US. The feeling at the moment is that while things are slowing down, the jobs market is still quite strong. So, you're not seeing employment rise. And you are seeing the various sectors suffering, other sectors doing okay. But I think the consensus is that it is possible that we could see a soft landing, but we tend not to see these things very often. The other thing, I think that we all still remember, you know, in short succession, the 2009 global financial crisis, and then the Covid recession as well. And both those was sharp and very painful. So, with those in our memories, we're going to think about any kind of recession as being extremely bad. And the reality is that they don't have to be quite that bad, they're not always going to be at that level.

Bruce Whitfield  03:12

The warnings today from Anglo American Platinum, we knew that their update was going to be a negative one, the prices of the commodities they produce the platinum group metals, everything from platinum to palladium to rhodium, and all the other ums, coming under a huge amount of pressure over the last 12 to 18 months. But not only that, just the disruption to the production that they can do as a result of power cuts is devastating. And it's coming through. We haven't seen updates with this detailed in a while, but does the impact on the mining industry, which is such a big consumer of energy, and necessarily so, and can't substitute all of its energy needs. It really shows it coming quite unstuck.

Arthur Karas  03:50

I think it's definitely part of the story. But for Anglo American Platinum, there's more to it than that. So, you know, it's one thing to get the metal off the ground, you then have to concentrate it and put it through this big kind of process that kind of gets rid of some of the rocks and then you have to smelt it. Now, that is a process that obviously uses a lot of electricity. But Amplatz has had some issues with its smelters, it's had the odd accident, it's had to rebuild some of them, and put them back together again, and getting these smelters online and kind of building them up and getting them going can take a while. So, they're being affected by that as well. And then there's also the fact is that these, these processes tie up a lot of the material that's been mined, so it's quite a bit of time from actually breaking the rocks in the ground as it were, and finally having some metal to sell. And there's a gap between that production and an actual selling of the metal. And that's one of the things that's impacted them. And then on top of the fact that they've seen their basket price of products that they mine go down. They're also still being affected by the price, by inflation, in terms of their processes. So, it's still their costs have gone up as well.

Bruce Whitfield  04:58

But with the prospect of a US and a China slowdown and sort of India picking up some of the slack as was just talking about a while ago. The outlook for... at least in the short term for commodities isn't fabulous.

Arthur Karas  05:10

Yes, I think that's reflected in the prices. So, if you look at the metal companies’ prices, their valuations have come down a long way. So, they had spectacular results a year or two ago. And that's kind of slowed down. Now, we're saying, okay, we're heading for recession, we're not seeing stimulus in China. So, it's reflected in the valuation. So, these companies are a lot cheaper than what they once were. And usually when these companies are very cheap, that's because we're expecting earnings to fall. And that's what's baked into a lot of the commodity companies’ prices.

Bruce Whitfield  05:39

Yes. So, hopefully, the worst is maybe over, maybe priced into this already, because what we are seeing, and I saw a note on Reuters today, saying that, for the first time in a while, foreigners have been nibbling at our shares and bonds. We're so used to the Monday morning announcement of foreigners, net sellers of South African shares and bonds... foreigners, net sellers, net sellers. Today, net buyers. What? Hold on a second. I know it's too early to call a change in trend. But that was something encouraging.

Arthur Karas  06:07

Absolutely. We have seen that for a long time. If, you know, over the last couple of years, we've seen foreign companies become the largest shareholder of a lot of our domestic companies. And the kind of weakening economic situation that we've seen over the last couple of years has seen a lot of foreigners exit those positions, at least cut them back. But that's also been combined with some local selling your local stocks, because you're all allowed to take more money offshore. So, that's led to an additional source of pressure on a lot of local holdings as the SA managers have sold down their SA holdings at the same time.

Bruce Whitfield  06:42

Yeah, but it's nice to see foreigners coming back. We need many, many more of them, of course, we need an end to load shedding, we need a little bit of certainty in terms of economic growth, and then everything's fine. Unfortunately, none of this stuff is easy, Arthur Karas.

Bruce Whitfield  06:56

I saw an interesting forecast today from Goldman Sachs, I don't know, it was just before I came on air this evening, and I'm not too sure whether or not you saw it. But Goldman Sachs is looking at the US Dollar, Rand. These things are notoriously unpredictable. But they're looking at the Rand/Dollar exchange rate in three months at around 18.25, which is kind of where it is the moment. In six months, 17.75. 12 months, 17.50 By the end of 24, they say 16. By the end of 25, they say 15. By the end of 2026, they say 14. That's unthinkable to us, those of us who are used to watching the Rand depreciate almost in perpetuity. I'm wondering whether or not Goldman Sachs is onto something here? Or is it just an anomaly of forecasting that you can change your mind at any moment, of course and say, well, yes, at that moment in time, we kind of thought by the end of 26 it would be 14 to the dollar. It didn't happen. Bad luck. What's your view?

Arthur Karas  07:53

Well, the first clue of forecasting is if you're going to forecast, forecast often. You don't want to be stuck with one number in front of you for the next couple of years. And the sell side is very good at that kind of thing. But I think what they're doing is, they're simply looking at where the economy is. They're saying that a lot of the factors that are driving the economy down, like loadshedding, like interest rates going up, those factors are not going to be there next year. Next year, even if rates don't fall rapidly next year, they're not going to go up by the same. And we are slowly and steady, as hard as what it might feel at times, we appear to be getting on top of the loadshedding. So, if you take loadshedding out of the picture, and then you add to the fact that the consumers won't be suffering from rate hikes plus cost of living increases to the same extent again next year. And then you turn around and look at our long bonds and say these are yielding, you know, above 11%, then you can say, wow, the SA stocks, we got a lot of good companies here that are about as cheap as what they've been in 20 years. Then the market looks attractive. And then it's not hard to imagine a scenario like that. But I'm not making a forecast.

Bruce Whitfield  09:07

Absolutely. But that's what's so interesting about this, they're actually putting their necks on the line and saying, we believe this is possible. And for those of us who sort of live in the environment of the continual depreciation in the mindset, it's weird and we need to change our assumptions perhaps or these challenge our own assumptions.

Arthur Karas  09:23

Well, the Rand hasn't been on a steady side for 20 years, the Rand is very much a roller coaster, with a bit of like, you know, like lower highs as we go along. So, there've been given a number of occasions where the Rand's been very weak and people have been okay, this is it, it's all over. It's just going to keep depreciating. That's often the time at which we get a bit of a cyclical upturn and things improve. The tough thing right now is if we're not really looking at a global cyclical upturn, that's one of the things that normally gets us going because we're a small open economy, we export a lot of what we produce to other parts of the world when they're booming, you know, the mining and metal's story and we're not seeing that part of the story. So, that's missing this time around and it makes it a bit harder to say, okay, this is a way that's going to carry us. But certainly, there's a lot of cyclical factors that have driven us down. And those cyclical factors will not be there over the next 18 to 24 months, all else being equal.

Bruce Whitfield  10:19

Thank you to Arthur Karas this evening. Arthur is Portfolio Manager at the Old Mutual Investment Group.